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Cars & traffic

May 20, 2012

Should cars be subsidised?

It’s a truth universally acknowledged that private cars are massively subsidised. Indeed, cars are an object lesson in the consequences of under-pricing. Because we don’t tak

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Costs per passenger-km for cars and public transport in Sydney, 2005/6 (from Glazebrook, 2009)

It’s a truth universally acknowledged that private cars are massively subsidised. Indeed, cars are an object lesson in the consequences of under-pricing.

Because we don’t take account of the social costs of driving when we get behind the wheel, we drive too often, too far and in vehicles that are too large. Our cities sprawl, our roads are choked by congestion and public transport languishes for want of passengers.

All that’s pretty familiar stuff, yet despite the central role under-priced travel plays in shaping our cities, it’s astonishing how difficult it is to find reliable and objective data on the level of subsidy for cars.

The Bureau of Infrastructure, Transport and Regional Economics (BITRE) published figures last year showing expenditure on roads by all levels of government in 2008-09 was $15.8 billion. Revenue from charges and taxes levied on motorists (excluding GST) was $15.6 billion in the same year.

However this doesn’t take account of social costs. The topic appears to be so under-studied that the Victorian Competition and Efficiency Commission (VCEC) identified only one set of numbers in its 2006 report on traffic congestion. Those weren’t prepared by a technical expert but came from a submission made to VCEC by an advocacy group, the Public Transport Users Association (PTUA).

The PTUA says motorists cost the Australian community $42 billion annually in cash outlays and negative externalities. However they only pay $27 billion in taxes and charges, therefore requiring a net subsidy of $15 billion.

The PTUA counts costs like road construction, the value of land used by roads, traffic accidents, tax concessions for cars, pollution and emissions. On the payments side, the calculation counts fuel excise, GST, registration, insurance and tolls.

Unfortunately the PTUA provides little explanation for the assumptions used in its submission. VCEC makes it clear it has misgivings about the methodology adopted. I’m in any event a little cautious about the calculations of activist organisations of all colours.

Another source of data is a more recent study by one of Australia’s leading transport researchers, Dr Garry Glazebrook, from Sydney’s University of Technology, published in 2009. Although he doesn’t account for payments made by motorists, his work is especially valuable because he estimates the private and social cost of travel by both car and public transport.

His calculation of the private costs of car travel (in Sydney) comprises the cost of purchase plus running costs, including fuel, registration, insurance, servicing, tolls and paid parking. The external or social costs include traffic congestion, accidents, emissions, pollution, noise and unpaid parking.

He treats fares as a private cost of train and bus travel. He estimates the external costs from emissions and traffic congestion imposed by these modes (he says buses account for 10-15% of traffic congestion in Sydney), but the big social costs of public transport come from financial subsidies paid by the State Government to keep fares down.

As the exhibit shows, Dr Glazebrook finds the private costs of car travel are much higher than those of public transport, indicating travellers are prepared to pay a lot for the benefits of private transport.

More interestingly, he finds the social cost of all three modes – i.e. the sum of subsidies and negative externalities – is essentially the same at around $0.38 per passenger kilometre.

So cars are subsidised as much as public transport. There’s an important difference though, which explains why one subsidy gets more attention from governments than the other.

The subsidy for public transport is mostly a financial cost – it is funded direct from the current budget. Hence governments worry about it because they have to find the funds in the current term.

The subsidy for cars, however, is mostly an economic cost. The cost of externalities like congestion, pollution and emissions are diffuse and are mostly borne by the community at large. Even where these costs impact the budget – e.g. higher health costs from pollution – they mostly manifest years down the track and hence are of little interest to the current government.

Because they’re not paid out in cash at the time of the journey (like fares are), it’s hard for both politicians and the public to see the real costs cars impose on the community. Governments are accordingly less responsive to the need to take action.

In the past it could be argued there were practical difficulties to making motorists pay their real costs. However recent technological advances, especially in computing and communications, mean the failure to take action is now due more to political contraints than technical ones.

Dr Glazebrook ignores the taxes and charges drivers currently pay. That’s arguable in the case of the fuel excise because it’s the largest payment made by motorists and directly influences their perceived cost of travel. However it only adds around $0.04 per (vehicle) kilometre to the cost of driving – that’s modest in the context of a social cost of $0.38 per passenger kilometre.

So yes, we should reduce the level of subsidy for car travel. The politics of change however would be truly horrendous. For example, fully recovering that $0.38 per passenger kilometre social cost would theoretically require the price of petrol to rise by roughly $3.45 per litre. It wouldn’t need to be that big in practice because motorists would inevitably find ways to adapt – for example by shifting to vastly more fuel-efficient cars – but it would nevertheless be very painful.

A large increase in the cost of driving would inevitably drive up demand for public transport (in fact it’s an essential condition – whether the increase is in cash or time – to achieve significant increases in public transport’s share of travel). Finding ways of funding large-scale public transport improvements would be an extremely important goal for policy.

Alan Davies — Editor of The Urbanist

Alan Davies

Editor of The Urbanist

The Urbanist is edited by Dr Alan Davies, a principal of Melbourne-based economic and planning consultancy, Pollard Davies Consulting.

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19 thoughts on “Should cars be subsidised?

  1. Daniel Bowen

    Hi Alan, in case you missed it, the PTUA’s VCEC submission links to this page: http://www.ptua.org.au/myths/petroltax.shtml – which towards the bottom details where the numbers came from.

    Daniel: Those numbers are different to those in the PTUA’s submission (see p90 of VCEC report). Are they a separate calculation or have they been updated? AD

  2. hk

    The word subsidy needs meaningful definition when it is bandied about and applied to the transportation sector. Some of us who are fortunate enough to live totally fulfilling lives without needing to use private cars, have no objection to our taxes contributing to our road based transport system for PT, freight, local delivery and pick-ups such as postal services, emergency, trade, service and similar vehicles. The main question is how much of our tax take should go into many of the inherent and avoidable inefficiencies in the road transportation system.
    There are many examples of where the high level of cross subsidy for private vehicle provision can be eliminated. Only two of the many follow:
    1) For example why should there be subsidizing of so much on street car parking outside residences? Car owners could pay the full cost for garaging their cars off the surface roads; a widely practiced solution to parking in urban communities in Europe.
    2) Also when the road system exceeds capacity, the system often runs at about 70% capacity with the consequential increased operating cost to all road users. The capacity demand situation is easily solved by ramp or entry metering. Ramp metering is already in operation by VicRoads to optimize freeway use in several locations. The delay of entry into congested road sections could be extended elsewhere to also optimize network operation by intelligent transport technology applications.

    To really stir the pot on full cost implications of private car use, consideration needs to be given to the sedentary behaviour of car occupants and their contribution to the burden of disease, which in turn increases life long health costs for the individual and the public.
    When the realization dawns that the current level of private car use in urban systems is not economically sustainable both in terms of infrastructure investment and adverse health impact, the level of cross-subsidy to private cars may be quantified and reviewed along the lines suggested by AD.

  3. Daniel Bowen

    AD: “Those numbers are different to those in the PTUA’s submission”

    That’s correct – the numbers here have been steadily updated as new data has become available, following the submission to VCEC going in several years ago.

    Older versions available here.

  4. Burke John

    It is indeed an easy sport thinking of uncounted car costs for Australia. Here is my second new one for today. How about the war in Afganistan? Here is one connection. Al Queida is largely oil-funded.
    Anyhow I’ve cut and paste some more below just to help anyone wishing to make a start.
    “Twenty years ago, in one of his punchy little books called Energy and Equity, Ivan Illich pointed out that if one factors in the time spent parking, servicing, washing, and doing paperwork for our urban commuter car, its average speed over the 20,000km per year that most of them do, drops well below the average speed attained in actual driving. In addition to this Illich pointed out that if we consider the time spent earning the money to pay for the car and its various parking, servicing and paperwork demands, the average speed declines again. If we now factor in the time taken to generate the infrastructure requirements of the car, such as road and street construction and maintenance services, police, EPA- recognised environmental services, hospital, medical, legal, political, roadside repair, tow truck, ambulance and insurance services, almost all of which are currently debited to our social and bureaucratic resources, the average speed of the commuter car comes down to something our shoes would be ashamed of and the average commuter cyclist would have no trouble exceeding. Coupled with an extensive and fully used metrorail network, the potential average speed of bike/rail would take some beating. To underscore the point, factor in the currently unrecognised time spent on environmental, personal and social traumas, and efficiency in relation to the private car as a means of urban commuting becomes a complete non sequitir.”
    Prof. Frank Fisher, Director of the Graduate School of Environmental Science at the University of Monash, Australia, 1997

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